## FX Swaps: Implications for Financial and Economic Stability

_IMF Working Papers, March 1, 2010_

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**Canonical URL:** [FX Swaps: Implications for Financial and Economic Stability](https://www.imf.org/en/publications/wp/issues/2016/12/31/fx-swaps-implications-for-financial-and-economic-stability-23653)

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## Bibliographic details
- Authors: Li L Ong, Bergljot B Barkbu
- Published: March 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451963533.001

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### Summary
- The proliferation of foreign exchange (FX) swaps as a source of funding and as a hedging tool has focused attention on the role of the FX swap market in the recent crisis.
- Turbulence in international money markets spilled over into the FX swap market in the second-half of 2007 and into 2008, raising concerns about:
  - the ability of banks to roll over their funding requirements;
  - banks' ability to manage their liquidity risk;
  - banks' continued supply of credit to the local economy; and
  - the external financing gap that could result.
- The paper examines channels through which FX swap transactions could affect a country's financial and economic stability and highlights strategies central banks can employ to mitigate market pressures.
- The paper does not offer a judgment on the instrument itself but shows that the use of FX swaps for funding and hedging purposes is not infallible, especially during periods of market stress.

### Key findings and implications
- FX swaps played a central role during the international money market turbulence in the second-half of 2007 and into 2008.
- Market stress in international money markets can spill over to FX swap markets, causing:
  - rollover risk for banks using FX swaps for funding;
  - amplified liquidity risk;
  - potential reductions in banks' credit supply to domestic economies; and
  - possible widening of external financing gaps for countries.
- The use of FX swaps for funding and hedging is vulnerable during periods of market stress and cannot be assumed to provide uninterrupted funding or risk mitigation.

### Strategies and policy implications for central banks
- The paper highlights strategies central banks can employ to mitigate market pressures stemming from FX swap market dysfunction. (The paper examines and highlights these strategies; it does not pass judgment on the instrument itself.)

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/fx-swaps-implications-for-financial-and-economic-stability-23653_